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| May 25, 2018

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CNN

5 reasons why you should care about the crisis in Venezuela (and the election)

May 21, 2018 |

You’ve seen news reports about chaos gripping Venezuela, but maybe you haven’t paid much attention to what’s going on. Here are five reasons why you should.
CNN.com – RSS Channel – Regions – Americas

Tillerson: Crisis in Ethics Threatens US Democracy

May 17, 2018 |

Former Secretary of State Rex Tillerson warned of a growing crisis in “ethics and integrity in our society and among our leaders” during a commencement address at the Virginia Military Institute, reports Politico . If not addressed, “American democracy, as we know it, is entering its twilight years,” he said. Although…
Newser

What’s In a Name? The Identity Crisis for Initial Coin Offerings

May 11, 2018 |

What's In a Name? The Identity Crisis for Initial Coin Offerings

Aaron Kaplan, securities attorney at Gusrae Kaplan Nusbaum PLLC and COO of Prometheum, where he has focused on blockchain and securities regulation.  He is guest author for this Opinion/Editorial. 

Initial Coin Offerings (ICOs) have become the investment du jour while the understanding of what ICOs are has become desperately convoluted. Every huckster, scammer and opportunist has tried to hop on the bandwagon. (I’m talking to you, Casey Ryback) Many of these ICOs were a means for scammers to raise money over the internet from unsophisticated investors whose “FOMO” outweighed the obvious red flags associated with such offerings.

Also read: Ver’s Sci-Fi Novel Life, Voorhees Buys Tucker’s Tie for $ 27k

Identity Crisis for Initial Coin Offerings

The rapid growth of the ICO industry ($ 6+ billion) and the inherent scams and related investor losses forced the SEC to consider ICOs in the context of the Federal Securities Laws (FSLs).  The SEC’s recent broad subpoena sweep marked the SEC’s official declaration that ICOs are securities. Now that ICOs must comply with the FSLs, it should come as no surprise that a new type of trickster is trying to hijack the innovation through either a) selling illiquid tokens to wealthy investors or b) selling traditional securities that are registered on a blockchain.

To set the record straight, and provide much needed clarity, here is a condensed description of ICOs and their intended benefit. ICOs are an innovative means of capital formation. Issuers offer a securitization of user interest in an ecosystem as an investment to the general public. Assuming the issuer has reasonable token economics, then the greater the user interest in the ecosystem, and the utility of the underlying token, the more the value of such token should increase. It’s supply and demand, but the price is not reflected in the common stock; rather, it is reflected in the cryptographic token representing the user interest. 

What's In a Name? The Identity Crisis for Initial Coin Offerings
Aaron Kaplan

Furthermore, an ICO should have two key features:

1. It should be available to the general public, and

2. It should be able to freely trade on the secondary market when the token is issued.

The securities of ICOs to date have not and cannot achieve both those goals. Such securities are illiquid and only available to accredited investors/institutions.

As the industry matures through compliance with all relevant rules and regulations, I fear we are losing the spirit of ICOs, which some argue may not be sustainable under the FSLs.

Issue 1: Reg D/SAFT ICOs

The Filecoin Reg D token offering in mid-2017 was an important point for honoring the Federal Securities Laws. Reg D ICOs raise capital with proper offering documents (a requirement under the FSLs) by selling tokens that have proposed utility in an ecosystem. While such ICOs are legal by nature, companies conducting ICOs in a Reg D (or a SAFT) offering forgot how an ICO was supposed to function.

These Reg D and SAFT ICOs inherently contradict the spirit of an ICO- a token sale that should be open to all investors (both accredited and non-accredited), and freely trading in the secondary market. Reg D and SAFT issuers’ token sales are only open to accredited investors (i.e. wealthy individuals and institutions) and are restricted securities (meaning they can’t trade freely on the secondary market until the issuer files current public information and essentially registers such securities with the SEC).

What's In a Name? The Identity Crisis for Initial Coin Offerings

These issuers, while understanding that ICOs are securitizations of user interest, missed the mark. Their ICOs are illiquid and limit participation to the wealthy. Investors won’t have the ability to trade those tokens, and are stuck with illiquid (untradeable) securities that have the same issues as those associated with traditional venture funding – waiting for a buyout event or going public (which is extremely rare) before investors can realize a return on their investment.

Issue 2: ICOs vs. Traditional Securities Issued Over a Blockchain

Opportunistic companies are also trying to use the concept of an ICO, turning an innovative method of monetizing an ecosystem into a cheap marketing ploy. The most frustrating example of this practice are companies who say they are raising capital for an ICO, but in reality they are just issuing traditional equity or debt securities that are represented by a cryptographic token. These aren’t ICOs, but rather traditional securities registered (like a transfer agent’s log) over a blockchain. While many (including me) believe blockchain securities are the future of securities ownership, a preferred equity token is not an ICO. It is a traditional security that is issued over a blockchain.

What's In a Name? The Identity Crisis for Initial Coin OfferingsSecurities issued over a blockchain MUST be distinguished from ICOs. An appropriate definition of an ICO in 2018 is the following: an ICO is a securitization of user interest. It is not a debt or equity security, but rather a new type of security – an investment whose value is related to the user’s interest in an ecosystem and the utility of the actual token in that ecosystem. It is essential that the industry understands the difference.

In late March, a company tried to issue a blockchain security for a building. Such cryptographic tokens represent ownership in the building and trade over blockchain. That is a traditional Reg D security, and not an ICO. The company received news coverage for being the first company to sell interests in a building using a blockchain. However, many companies have sold interests in real property online. This company is doing the same thing – basically putting lipstick on a pig.

So how do we define an ICO?

ICOs are innovative ways to unleash/monetize potential value from the user interest in an ecosystem. ICO tokens represent a new type of security whose value is related to the user appetite in that ecosystem (daily average use, recurring use, etc.). Ideally, an ICO should be available to all types of investors (accredited and non-accredited) and be freely tradable when the underlying network goes live.

With ICOs officially coming under the FSLs regime, the industry should take a moment to reflect on what an ICO is and will be under the FSLs before it morphs from a genuine innovation into a marketing ploy.

This is an Op-ed article. The opinions expressed in this article are the author’s own. Bitcoin.com does not endorse nor support views, opinions or conclusions drawn in this post. Bitcoin.com is not responsible for or liable for any content, accuracy or quality within the Op-ed article. Readers should do their own due diligence before taking any actions related to the content. Bitcoin.com is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any information in this Op-ed article.


How do you define an ICO? Share your thoughts in the comments section below. 


Images courtesy of Shutterstock.


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TMZ

Harvey Weinstein Fires Off Lawsuit, Demands $300k in Crisis Assistance

May 7, 2018 |

Harvey Weinstein’s rainy day has arrived — it’s more like a monsoon, really — and he’s insisting his insurance company cover his ass, because that’s why he’s been paying his premiums. Weinstein’s insurer, Chubb Indemnity Insurance Co., ran to…

TMZ.com

Facebook Posts Surge in Revenue as It Tackles User-Data Crisis

April 26, 2018 |

Facebook, in its first earnings report after touching off widespread data-privacy concerns, posted soaring revenue and profit that highlighted the company’s central place in the digital economy.
WSJ.com: US Business

John Oliver’s Weapon Against ‘Crisis Pregnancy Centers’: His Own

April 9, 2018 |

So-called crisis pregnancy centers have come under fire for years for allegedly using misinformation to talk vulnerable pregnant women out of having an abortion, and John Oliver took up the topic Sunday on Last Week Tonight . “What is happening with CPCs is that, way too often, women with unplanned pregnancies…
Newser

How Facebook’s Past Data Policies Led to Its Current Crisis

March 25, 2018 |

A key period in Facebook’s past—when developers were able to access huge amounts of data—is coming back to haunt the social network.
WSJ.com: US Business

CNN

Brisa de Angulo: Battling Bolivia’s sexual abuse crisis

March 24, 2018 |

CNN speaks with a sexual assault survivor, who has made it her life’s work to change attitudes and laws in Bolivia around sexual assault.
CNN.com – RSS Channel – Regions – Americas

Facebook’s Lax Data Policies Led to Cambridge Analytica Crisis

March 21, 2018 |

Facebook’s loose approach to policing how app creators and others deployed its user data persisted for years, including after a 2015 effort by the social network to restrict access, according to court records and people familiar with the social-media giant.
WSJ.com: What’s News Asia